The SA Reserve Bank - Gill Marcus interview
It’s been almost a year since Gill Marcus took the hot seat at the Reserve Bank. Claire Bisseker speaks to the governor and delves into the Bank’s thinking on SA’s most important economic challenges.
Pragmatic and cool, the Reserve Bank’s leadership is in no mood to make grand but futile gestures in reaction to global pressure and political posturing at home.
The global economic recovery remains fragile; the US and China are becoming increasingly adversarial; and emerging markets are bearing the full brunt of a currency war. But in SA, don’t expect extraordinary measures from the Bank.
A number of countries are trying, with little success, to prevent their currencies from being buoyed by a rising tide of capital from the developed world.
The rand is being swept up with other emerging market currencies, hitting R6,76/US$ recently — its strongest level in almost three years. Rand strength could continue for some time.
With inflation trending towards 3% and SA’s economic recovery stalling, the Bank is under intense pressure to cut rates again in November and intervene more aggressively in foreign exchange markets to weaken the rand.
Now is not the time to be in governor Gill Marcus’s shoes. Not only is SA at the mercy of capital flows that dwarf its economy, but her job is complicated by simmering political discontent at home. Cosatu is seeking to reverse the Bank’s independence and have it pursue a developmental agenda, in the misguided belief that a central bank that puts growth ahead of low, stable inflation would be able to deliver more prosperity.
If Marcus is feeling the heat, she shows no sign of it. As she speaks to the FM from her penthouse office suite at the Reserve Bank in Pretoria, the only sign of tempest is the wind howling outside. “It’s a difficult and fragile time,” she says . “The challenges are big for emerging markets like ours ... and I don’t think there’s anyone in SA who would disagree that there’s an overvaluation of the rand at this point.”
The problem, she explains, is that the various options open to central banks have huge costs, and they don’t appear to be working very effectively in the current environment. Take the extent of the Bank’s intervention so far. Having been absent from the markets since late 2007, the Bank intervened meaningfully for the first time in August this year when the rand tested R7,20/$, purchasing $500m. Then in September, when the local unit broke R7/$, the Bank was back. This time it purchased $700m.
Despite this, the rand at around R6,80/$ is stronger than when the intervention started. Granted that purchases of around $500m are not massive, even by SA’s standards. In the 1990s, the Bank would buy and sell more than $4bn in a month, though it got badly burnt in the process. But even after the policy was changed to pure reserve accumulation in 1998, it wasn’t unusual for the Bank to purchase more than $2bn/month.
Rand Merchant Bank currency strategist John Cairns defends the Bank, arguing that it is right to intervene only at the margin to relieve pressure on the rand, rather than reverse the trend. “What we are seeing is US dollar weakness rather than rand gains, and to think that the mighty Reserve Bank can somehow stabilise the US dollar is ridiculous.”
Marcus raises another consideration: this is not a short-term issue. The conditions that are supporting emerging market currencies could last for a while. Moreover, capital inflows may be developing a structural, longer-term component, she says, as overseas pension funds and other long-term investors search for better yields. This means the rand could stay strong for as long as interest rates in advanced countries stay abnormally low.
“That’s why your policies need to appreciate that it’s not a quick fix and it’s not one action,” she explains. “It’s got to be a combination of actions that allow you to respond as appropriately as you can ... It would be different if it were just a quick in and out, but that’s not what it looks like — remember, this crisis has already been going for three years.”
There is one fresh intervention the Bank is prepared to make, however. Given the exceptional inflows of foreign direct investment (FDI), as well as purchases of bonds and equities – the Bank has decided to act to alleviate some of the pressure on the exchange rate by purchasing the FDI inflows, either through direct transactions or from the market. It is already giving effect to this having absorbed, over the past few days, the foreign exchange inflows related to the Didata transaction.
“Apart from possibly contributing to moderating current appreciation pressures on the exchange rate of the rand, such purchases are in keeping with our stated policy of building reserves,” Marcus says.
The Bank is in discussions with national treasury about all available policy options. Marcus is quite resolved that an interest rate reduction or currency targeting is not the only way to go — a mix of tools is needed. Some are within the Bank’s control, others are not.
For instance, she points out that making changes to the tax rate may enable a more targeted response than the broad brushstroke of changing the level of the exchange rate. But because the exchange rate is so visible, people fixate on it. “All I’m saying is that, in a situation like this, ... we look at all our options: macro and micro; trade and other,” she says. “What are we doing around tax? About depreciation? What are we doing about input costs? What do we pay for steel? Why do we pay London metal prices? All of those are part and parcel of your solutions — and they all have trade-offs.”
She warns that for central banks this is “difficult, uncharted territory” in which policymakers need to be aware of hidden costs and unintended consequences. “It calls for a sober approach.”
Taking on China, as the US appears to want to do, would not be Marcus’s approach. The US is in dispute with China over the latter’s policy of dampening the yuan, thereby making Chinese exports more competitive. With US exporters crying foul, and US unemployment at record levels, a rising tide of protectionism is developing against the East.
But the US Federal Reserve, under Ben Bernanke, also needs to shoulder some of the blame for having created, through its abnormally loose monetary policy, the excess global liquidity that is destabilising the rest of the world.
The ensuing dollar weakness has set in motion a chain of competitive currency devaluations. From Japan to Brazil, countries are trying to weaken their currencies to export their way out of trouble. Commentators are calling it “a currency war” and the International Monetary Fund warns that it threatens to undermine the global recovery.
Marcus doesn’t think putting pressure on China is the answer. “If I were the US, I’d think this was about how we understood what our own challenges were and how we worked together. I don’t think it’s helpful to think: how can we tackle China?”
The IMF and G20 are grappling with the issue of how to co-ordinate global exchange rate policies but the problem is decades in the making and the sides are miles apart. With the US contemplating a fresh round of quantitative easing (increasing money supply), the problem is likely to get worse.
In parliament last week, finance minister Pravin Gordhan said the strong rand was hurting the economy but warned against SA trying to go it alone, saying these structural global problems “would not be solved by the unco-ordinated, unilateral actions of a few countries”. The Bank is on the same page, but this doesn’t mean it is in any way comfortable with the rand’s current level. Marcus agrees that the rand is overvalued and affecting exports and other aspects of the economy negatively.
Nevertheless, she would prefer SA took advantage of the opportunities a strong rand presents to reduce the costs of government’s huge infrastructure spending programme, since much of the capital equipment required has to be imported.
Another positive spin-off she identifies is that the strong rand has contributed to the low inflation environment, giving the Bank more room to cut interest rates.
The Bank has cut rates by 600 basis points since the start of the crisis in December 2008, the last 100 basis points of those cuts falling under Marcus. The prime interest rate is at a 30-year low.
Some commentators believe the Bank under Marcus is more sensitive to growth issues. She denies, however, that growth matters more than under previous governors, or that there has been a subtle shift in the weight it attaches to growth issues as opposed to inflation issues. “I wouldn’t want it to be interpreted that we’re soft on inflation, because we’re not,” she says. “We’ve got a different environment at the moment and, if you have low inflation, you’ve got room to look at other things, so I wouldn’t say there’s been a shift.”
What she does concede is that factors relating to economic growth may be assuming greater prominence in the Bank’s work because it’s going out of its way to find out what is happening in the real economy — factory by factory, mine by mine, sector by sector.
Marcus has instituted an outreach programme and a gamut of meetings, working through the labour unions, as well as representatives of each sector of the economy, to find out what is happening on the ground. In the past, this work was mainly left to the Bank’s research department but Marcus has elevated these discussions to governor and CEO level. She leads the meetings herself where possible.
Marcus has also shown more willingness than previous governors — such as Tito Mboweni and Chris Stals — to explain the policy process and forward-looking nature of the Bank’s decisions.
In a departure from past practice, she forecast the future of interest rates at the Bureau for Economic Research conference in April this year, saying there probably wouldn’t be any more cuts this year. As it turned out, the Bank cut rates last month and more cuts may be on the cards.
Has this put her off signalling the path of interest rates? Marcus says the Bank does signal in every statement of the monetary policy committee (MPC).
April was a specific case, she explains, where her comments weren’t so much about signalling ahead but about wanting to cool feverish expectations that there would be a rate cut in May.
“If there is such a build-up of anticipation and you make it a certainty, you’re surprising the market if you don’t do it. We wanted to avoid that. I don’t think you should surprise the market,” she says. “As we said in the last statement, we think this is a low point in interest rates — unless something happens. Now a couple of things have occurred: you look at where the rand is, where inflation is coming out, lower than expected ...”
Does this mean there could be another cut when the MPC meets in November? “Not necessarily,” is her response. There are many factors that have to be taken into consideration.
Even if the economic environment were more settled, Marcus says, she would be reluctant to forecast the path of rates. The MPC should be focused on the data, she believes, not on whether it will be surprising the markets with a decision. “It shouldn’t be a factor that you have to weigh up: how will it be interpreted if I change my mind? If the data changes, you may have to change your mind.”
Part of the rationale behind the outreach programme is to educate society about the role of the Bank and what monetary policy can and can’t do.
Outsiders often comment that SA is obsessed with monetary policy; that its population imbues it with a power it doesn’t have. Too many people, including politicians, think that if the Bank were nationalised, or given a developmental mandate, then with one wave of its magic wand it would lower interest rates and solve unemployment.
Marcus agrees that the question of nationalising the Bank is nothing but a red herring. “It’s got nothing to do with ownership. It’s got to do with what the work of a central bank is and what the work of other sectors of the economy and government is.”
For instance, there’s no question that SA’s big challenge is addressing unemployment. Everyone agrees on that, but “the solution isn’t necessarily that you intervene on your currency”, says Marcus. “It may be part of the solution, but you’ve got to look at education: why are there job losses? What are the structural questions? What do we all have to do?”
Speaking in Cape Town earlier this month, Marcus added that the fact that SA lost about one million jobs during the current crisis, demonstrates that the country does suffer from a fair amount of labour market flexibility. “If we are looking at job creation as a priority to address unemployment, then current labour legislation, which extends wage determination to all firms in a particular sector, needs to be examined regarding its effects on small and medium enterprises,” she said. “At the same time, competition policy should be enhanced to reduce the occurrence of monopolistic pricing and other anti-competitive pricing policies.”
She also suggested that consideration be given to instituting direct special targeted support measures at those sectors of industry that are being hardest hit by the strong rand. These could include direct subsidies or tax concessions to encourage continued production and/or the retention of employment.
The debate within the ANC alliance over the appropriateness of inflation targeting and the Bank’s mandate has been placed on the back burner. But Marcus feels it hasn’t gone away.
Though the Bank has always had a dual mandate — in terms of the constitution it must “protect the value of the currency in the interests of balanced and sustainable growth” — this has been narrowly interpreted in the past. The importance of creating or preserving jobs is not part of the Bank’s explicit mandate, a fact that many critics, including Cosatu and the SA Communist Party, deplore. They argue that a narrow focus on inflation leads to an austere interest rate regime that chokes growth.
“My sense is that these are always going to be issues for discussion,” says Marcus, “but I don’t think it’s a hostile discussion. I think it’s a discussion around real issues.”
She is not unhappy with the Bank’s mandate. Whether it pursues inflation targeting or some other monetary policy regime, the core function of a central bank is tackling inflation, she says. “That’s a constitutional mandate; you’re not going to wish it away.”
That said, she believes it’s up to the Bank to work in a manner that builds trust and confidence and shows that it appreciates the difficulties experienced by ordinary South Africans.
Even so, she stresses there are policy choices that have to be made regarding the stewardship of the economy and they are not just up to the Bank. “SA has all the ingredients to be a successful country. We just need to put them in the right order and mix our mixture properly.”
But the task so often seems to be beyond us. SA is forever talking about devising a new growth path but the lack of policy cohesion among the economic ministries makes it a nightmare to craft. As a result, SA is forever mixing but never producing the cake.
“I think we can do it but we need to rebuild trust and confidence in each other and ourselves ... and deal with the issues that are wrong,” she says. “I’ve got enough on my plate — that’s somebody else’s baby.”
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